The Washington State marijuana revenue estimate

I’m glad I didn’t have the assignment of guessing how much revenue Washington State might reap from legalizing marijuana. And the state Office of Financial Management put an appropriate number of caveats in its analysis: after all, the Feds might just decide to shut the whole thing down.

Still, what everyone will see is the bottom line of more than $500 million a year, which would be about 3% of state revenues. I’m not buying it.

The sales volume estimate is built up from survey data: so many users smoking every year, so many every month, so many every week, so many every day. That’s a reasonable approach. But those estimates of days of use are then multiplied by two grams per use-day to get a quantity estimate. Two grams is roughly 5 joints: not consistent with anything we know about actual patterns of marijuana use, except for the extreme right-hand tail of the distribution. Given that the price estimates assume dispensary-grade sinsemilla rather than lower-potency commercial grade, I’d divide that number by five.

On the other hand, the implicit assumption is that legalization wouldn’t increase consumption at all, which seems grossly implausible. But the assumption of a $12/gram retail price – the same as the current medical-dispensary or illicit-market price for moderately-high-potency pot – seems hard to justify. You’d expect competition to drive down prices. (The AP story says that the 25% retail tax and 10% sales tax would be on top of the $12 estimated retail price; if so, you’d have to expect the illegal market to keep on working, since some consumers would prefer illegal product at $12/gm. to legal product at $16/gm.)

How would I have gone about making such an estimate?

Well, the total national retail cannabis market is about $15B per year. Washington State has 2.2% of the national population. So the current retail market in Washington should be about $330M/yr.

With 25% tax collected up to three times – once from the producer, once from the processor, and once from the retailer, though apparently some growers can do their own processing and skip the tax – plus ordinary sales tax on top of that, Washington State and its localities should wind up collecting something like half of what consumers pay, or about $100M-$150M/yr. if the consumption increase and the price decrease turned out to offset each other.

Of course, the big bonanza for Washington State would be the potential “export” market to the other 49 states, Canada, and even Mexico. But equally of course, that’s exactly what would bring on a federal crackdown.